Difference Between IAS 10 Under Going Concern and IAS 10 Under Liquidation

Introduction

IAS 10, “Events after the Reporting Period,” deals with the recognition, measurement, and disclosure of events that occur after the reporting period but before the financial statements are authorized for issue. This report explores the key differences in applying IAS 10 under a going concern assumption and during liquidation.

IAS 10 Under Going Concern

Core Principle

Under IAS 10, the core principle is to identify and appropriately account for events after the reporting period. These events are classified into two types:

• Adjusting Events: Events that provide additional evidence of conditions that existed at the end of the reporting period.

• Non-adjusting Events: Events that are indicative of conditions that arose after the reporting period.

Adjusting Events

Adjusting events are those that provide further evidence of conditions that existed at the end of the reporting period. Financial statements are adjusted to reflect these events.

Example: A company discovers after the reporting period that a customer who owed a significant receivable at year-end has gone bankrupt. This event provides evidence of the receivable’s impairment at the reporting date, so the financial statements are adjusted to recognize the impairment loss.

Non-adjusting Events

Non-adjusting events are indicative of conditions that arose after the reporting period. These events do not result in adjustments to the financial statements but are disclosed if they are of such importance that non-disclosure would affect the ability of users to make proper evaluations and decisions.

Example: A company decides to issue shares after the reporting period. This decision does not affect the financial position at the reporting date but is disclosed in the notes to the financial statements.

Going Concern Considerations

Management must consider whether events after the reporting period affect the entity’s ability to continue as a going concern. If events indicate that the entity may not be a going concern, financial statements should not be prepared on a going concern basis.

Example: A significant post-reporting period loss that raises substantial doubt about the company’s ability to continue operating should lead to disclosures about the uncertainty and potentially adjusting the basis of preparation if the going concern assumption is no longer valid.

Disclosures

Entities must disclose the date when the financial statements were authorized for issue and who gave that authorization. They should also disclose the nature and financial effect of significant non-adjusting events after the reporting period.

Example: A company discloses that its financial statements were authorized for issue by the board of directors on March 15 and describes any significant non-adjusting events that occurred after the reporting period.

IAS 10 Under Liquidation

Core Principle

During liquidation, the focus shifts to the immediate realization of assets and settlement of liabilities. The recognition, measurement, and disclosure of events after the reporting period must reflect the liquidation context.

Adjusting Events

Adjusting events remain the same in terms of providing additional evidence of conditions that existed at the end of the reporting period. However, given the liquidation context, these events may result in significant adjustments to the financial statements.

Example: If a company in liquidation discovers after the reporting period that an asset expected to be sold for R1,000,000 has significantly decreased in value to R500,000, the financial statements are adjusted to reflect this lower value.

Non-adjusting Events

Non-adjusting events in the context of liquidation are likely to involve significant actions related to the liquidation process. While these do not result in adjustments to the financial statements, they must be disclosed to provide a complete picture of the liquidation process.

Example: A company in liquidation decides to sell a major subsidiary after the reporting period. This decision does not affect the financial position at the reporting date but is disclosed to inform users about significant steps in the liquidation process.

Going Concern Considerations

The going concern assumption is no longer applicable during liquidation. Financial statements must be prepared on a liquidation basis, which involves adjusting the carrying amounts of assets and liabilities to reflect their expected realization and settlement amounts.

Example: A company in liquidation prepares its financial statements on a liquidation basis, adjusting the values of its assets to reflect their expected sale proceeds and its liabilities to reflect the amounts expected to be settled.

Disclosures

Disclosures during liquidation should reflect the change in the basis of preparation and provide information about the events after the reporting period that impact the liquidation process. This includes details about significant non-adjusting events and their financial effects.

Example: A company in liquidation discloses the date when the financial statements were authorized for issue, any significant post-reporting period events related to the liquidation, and how these events impact the expected realization of assets and settlement of liabilities.

Immediate Realization and Settlement

During liquidation, the focus is on the immediate realization of assets and settlement of liabilities. Events after the reporting period that affect these processes must be disclosed to provide a complete picture of the liquidation status.

Example: A company in liquidation discloses a significant decline in the market value of its remaining inventory after the reporting period, indicating how this affects the expected proceeds from asset sales.

Loss of Future Economic Benefits

As the liquidation process progresses, the entity no longer considers the future economic benefits of its assets, focusing instead on their immediate liquidation value. Events that impact the expected liquidation value must be disclosed.

Example: A company in liquidation discloses an event after the reporting period that significantly reduces the expected proceeds from the sale of a major asset.

Conclusion

The application of IAS 10 under a going concern assumption and during liquidation involves the same fundamental principles but different practical considerations. Under going concern, the focus is on identifying and appropriately accounting for events that provide additional evidence of conditions existing at the reporting date or that are indicative of conditions arising after the reporting date. In contrast, during liquidation, the emphasis shifts to reflecting the immediate realization of assets and settlement of liabilities, with adjustments and disclosures that provide transparency about the liquidation process. Entities must carefully reassess their recognition, measurement, and disclosure of events after the reporting period to ensure accurate and transparent financial reporting during liquidation. This adjustment ensures that stakeholders receive a true and fair view of the entity’s financial position and performance during the liquidation process.

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